If you’ve seen advertisements by lenders saying “No credit, no problem,” then you may have heard of car title loans. And chances are, you could end up with a problem.
Like their maligned brethren payday loans, car title loans prey on the poor and underbanked, offering loans of $1,000 or less with an annual percentage rate of 200 percent or more on the loan.
A car title loan does just what the name implies — it uses your car as collateral if the loan isn’t paid, which means that a missing payment could lead to repossession. Worse yet, the loan can be rolled over monthly indefinitely as the borrower pays only interest each month.
If you own your car outright, you can sign over the title to the lender and then get it back once your loan is repaid. Typically, up to 25 percent of the car’s value can be borrowed in a title loan.
According to the Pew Charitable Trusts, the typical car title loan is $1,000. Payment is either due in a single payment after one month or repaid in installments over two years. Pew reports that such borrowers spend about $1,200 per year in fees on a typical loan at 300 percent APR financing.
For borrowers who don’t pay their car title loan on time, they end up paying much more in interest.
A 2016 study by the Consumer Federation of America and the Southwest Center for Economic Integrity found that the average borrower renews a one-month title loan eight times. A $500 loan renewed eight times would cost $765 in finance charges for a total payment of $1,265 after nine months.
Better options exist
To avoid an auto title loan, the best option is to go to your bank or credit union and get a loan. It’s unlikely that the bank will accept your car as collateral, and will instead require a good credit record to get its best loan rates.
Even a cash advance on a credit card is cheaper than a title loan.
For people who do get car title loans, the best time of the year when they’re most likely to repay them is at tax refund season in April. A tax refund from the government can seem like a windfall, giving borrowers a chance to repay their loans and hopefully get out of debt.